A Formula for Failure
While there has been much debate over proposed stimulus plans for our lethargic economy, little attention has been given to determining what exactly we are trying to stimulate. The Great Recession has exposed a major flaw in the American economy beyond risky derivatives and Hoover-esque regulations. This crisis has exposed an incentive structure for our intellectual elite, encouraging many of them to seek success at the expense of our society instead of through benefiting it. As China and India continue to funnel their college graduates into science, engineering, and other fields that set the pace for 21st century economic growth, America has opted for a formula based on investment bankers and lawyers that has already proven flawed.
Although the legal profession is often the butt of endless jokes, underlying this sentiment is a general, albeit reluctant, feeling that lawyers are necessary for society to function. This belief is even more pertinent today, as we fight to protect precious civil liberties during wartime and to guard our privacy from technological advancements. Investment banking is also a valuable asset to any free market economy, providing necessary capital for business growth. Yet as Mark Twain so eloquently observed, with the exception of good whiskey, too much of anything is bad.
Law certainly does not need a bailout. The American Bar Association notes that at the end of last year there were around 1.14 million active attorneys in the United States, doubling the 1980 figure of 542,000. While the American population has grown sizably in the last 30 years, the increase in the number of lawyers has far outpaced society’s growth. This trend can be expected to continue well into the next decade. Dreams of working at firms such as Davis Polk & Wardwell in New York or Jenner & Block in Chicago have pushed both the quality and quantity of law school applicants to heights comparable to the firm’s skyscrapers. Last year, total law school enrollment was well over 152,000 students, a 21% increase from just three decades ago.
While the extent and impact of these trends has proven to be contentious issue, there is little doubt that the continuing influx of attorneys has altered American behavior. Increase in the number of law firms and the size of the firms themselves has unsurprisingly led to a massive increase in litigation. In 1980, the number of civil cases filed in U.S. District Courts was approximately 150,000; in recent years filings have totaled around 270,000. Although this disproportionate growth in lawsuits has produced some animosity, it is important to acknowledge certain benefits from this activity. With new federal legislation on civil rights, occupational safety, and consumer protection, a portion of this influx does contribute to new social welfare awareness.
However, a large percentage of these civil cases also fall into the “frivolous” category, often at the expense of society itself. The quintessential example can be found in doctors’ offices all across the country: the issue of medical malpractice. With 10% of all healthcare costs spent on either on malpractice insurance or defensive medicine, the American patient and consumer is forced to pay an ever increasing annual premium. Beyond the financial impact, the surplus of malpractice litigation is creating a national dearth in medical care. In New Jersey, where malpractice rates are some of the highest in the nation, this “hostile environment” towards doctors is leading to a projected shortage of 2,800 physicians over the course of the next decade.
Although not as startling in terms of size as the growth of the legal industry, the growing desire of our nations brightest to work in finance, investment banking, and Wall Street is equally as concerning. According to the Bureau of Labor Statistics, the number of Americans employed in finance has risen from approximately 5 million in 1980 to over 7.5 million today. The lure of working for McKinsey or Goldman Sachs has created an “Ivy-to-Wall Street pipeline.” A recent study conducted by Payscale Inc. concluded that a significantly higher proportion of Ivy League graduates enter finance than their peers at other institutions. Throughout most of this past decade, the percentage of Harvard graduates seeking employment in finance has hovered at around 1/3 of the class. Wall Street’s recent revival has sparked a return to near pre-recession numbers as our nation’s best seek more to imitate Gordon Gekko than John Harvard.
Rehashing the dangers that excessive and uncontrolled investment banking poses to our economy is superfluous; the American people are living with the repercussions. We are all familiar with the narrative of greedy “investors” using sub-prime loans and predatory lending in ongoing effort to outdo their competition for better bottom line profits. However, the larger danger to the economy is the fundamental restructuring of both our concept of supply and demand and the role of production in goods and services. There has been no industry in the last several decades that has experienced greater profitability than investment banking and Wall Street. In 1980, financial firms represented a seventh of all American business profit. By 2006, these same firms came to incorporate as high as a third of all U.S. profit. As the New Yorker’s John Cassidy notes, “During a period in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing.”
While much of the focus on the recent influx of lawyers and investors centers around the negative implications of this growing trend, America suffers more from the important fields our elites have ignored than from the lucrative ones they pursue. In response to the rapid rise of active attornies in the United States, Supreme Court Justice Antonin Scalia notes, “maybe we’re wasting some of our best minds.” Scalia adds that after reading impressive work by proceeding counsel, he often ponders, “Why isn’t he/she out inventing the automobile or, you know, doing something productive for this society?” In relation to his field, Harvard Economics Professor Benjamin Friedman notes a similar danger in the steep rise of our elite graduates in financial firms. Friedman contends, “At the individual level, no one can blame these graduates. But at the level of the aggregate economy, we are wasting one of our most precious resources. While some part of what they do helps to allocate our investment capital more effectively, much of their activity adds no economic value.”
Although other industrial powers have adapted to the 21st century economy of science and engineering, the United States continues to embrace its flawed formula of excess in lawyers and investors. This past year American undergraduate institutions awarded just 16% of their degrees in the natural sciences or engineering, in comparison to China’s 47% and South Korea’s 38%. The future Thomas Edisons or Henry Fords are unlikely to be found in a nation that ranks 27th in graduating engineers. Although we are supposed to celebrate President Obama’s recent tax deal as good policy and a strong economic stimulus, the underlying problem remains wholly unaddressed. America suffers not from a lack of jobs, but from a lack of job makers. Until the latter replaces the former in U.S. policy, the country will continue in its Carter-esque and soon to be Obama-esque ‘malaise.’